This article compares and contrasts two cases, one focused on an energy management company and the other on a car repair business.
Exclusion
In both cases the primary complaint regarding unfairly prejudicial conduct related to exclusion. In both cases the Judges found that the exclusion was not unfair.
Mr Corran was a minority shareholder, with the Butters brothers holding 51% of the shares in the company. Unbeknown to himself he was an undischarged bankrupt. He had been made bankrupt in 2001, had then moved to Hong Kong and returned later; he assumed that, as three years had elapsed, that the bankruptcy had run its course. Sometime after he had discovered that he remained undischarged, he notified the two Butters brothers. Their action in removing him from a managing role was found to be justified.
Mr Davies was a 25% shareholder, with Mr Lynch-Smith owning 75%. Mr Davies had some involvement with a competitor business and lost the trust of Mr Lynch-Smith. His exclusion was ‘richly deserved’.
The Judges in both cases had clearly formed adverse opinions of both claimants: Mr Corran was described as an unreliable witness who acted without regard to business scruples. Mr Davies was found to be an argumentative and difficult witness who had been deliberately misleading the Court. Such observations are not lightly made by the Judiciary.
Other Section 994 Points of Potential Prejudice
Mr Corran raised a series of other points: an excessive management charge had been raised on the company from another Butters’ company; a lease had been entered into relating to a property owned by the Butters; pension contributions of £64,000 had been paid in respect of the Butters; by virtue of these actions, dividends had not been declared which should have been declared. The Judge decided that the pension contributions totalling £64,000 were unfairly prejudicial but did not accept the other points.
Mr Davies had a catalogue of further complaints, several of which were found to represent unfairly prejudicial conduct: a management charge had been increased from £45,000 to £145,000 without justification; a sum of £100,000 had been advanced to a sister company to enable a tax bill to be settled; two damaged high-end cars had been bought for repair and resale, described as ‘vanity projects’; a Tesla, costing £164,000 had been bought for the use of Mr Lynch-Smith. The Judge concluded that the company was now being run as if it were Mr Lynch-Smith’s own company and that this was likely to continue.
Non-Payment of Dividends
The Judge distinguished between the very narrow way in which the dividend point had been argued on behalf of Mr Corran, and the wider point of dividends generally. The alleged failure to pay dividends had been related to the payments taken from the company.
He stated that there was no valid dividend claim in respect of excess payments to the Butters or their businesses. However as there were profits of £3 million which had been generated and paid to a holding company, there was the prospect of a later claim by Mr Corran in that regard. He would not progress it as it had not been pleaded.
Contractual Relationships
Both Judges focused less on questions of quasi-partnership and more on the contractual relationships between the parties as being the major determinant.
In the first case the Judge quoted approvingly from Brett v Migration Solutions Holdings Limited [2016] EWHC 523 (Ch):
‘A lot of the jurisprudence refers to the applicability of the jurisdiction where there is a ‘quasi-partnership’. A certain amount of effort in this case has gone into establishing whether the facts of this case fall within that description or not. I do not propose to spend much time in considering that particular pigeon-holing exercise because the existence of a ‘quasi-partnership’ is not determinative of the question of whether equitable constraints on the exercise of legal rights apply.’
He focused on the contractual terms under which the shareholders had agreed to be bound in the form of the Shareholders’ Agreement. It was this document which should determine the obligations and rights of the parties at first instance.
A similar approach was taken in the second case: Mr Lynch-Smith had not set up in business with Mr Davies; Mr Lynch-Smith had set up the business and thereafter took Mr Davies on as manager. Mr Davies then received 25% of the shares in order to act as incentive to him. Mr Lynch-Smith retained the ability to remove Mr Davies as a director should he so wish due to his 75% shareholding. These considerations were the dominant ones.
The Remedies
In the case of Corran and Butters the Judge found only one area of unfairly prejudicial conduct. He therefore did not agree to the shares of Mr Corran being purchased. There was a simple remedy which was fitting for the circumstances: the Butters should put £64,000 back into the company.
In the case of Davies and Lynch-Smith there were rather more cases of unfairly prejudicial conduct: Mr Lynch-Smith treated the business as his own and therefore a buyout was ordered. Each, viewed on its own, would only have justified the reimbursement of the funds to the company. However, when viewed in aggregate, this was not appropriate redress. However, as the holding of Mr Davies was a minority one, a minority discount should be applied.
The Valuation
There was no need for valuation evidence in the case of Corran and Butters. In the case of Davies and Lynch-Smith, there were two valuation experts who gave their evidence concurrently and who had prepared a helpful joint statement.
They were agreed that for a holding of 25% on a minority basis a discount of 60% was applicable. They were agreed on the use of an EBITDA multiple. The multiples ranged from 5.45 to 3.5. They agreed that the appropriate source was the UK 200 Small and Medium Enterprise Valuation Index with a median of 4.2 and a mean of 6.2. The Judge determined a multiple of 4.55.
The other area of differences was reasonable remuneration. The judge settled on a figure of £100,000 a year, inclusive of NIC, with two days input per week being required, giving reasonable remuneration of £40,000 a year.;
Andrew Strickland